Accounting Concepts are the foundation to lay an organized accounting system in an organization. Accounting concepts are very vital for every company as this helps to remain in sync with the industries as for using the same accounting concept. All these also help in better comparison. The concepts give the management a better view and help manage the accounting system with an even tone of management.
In detail we will discuss the concepts of accounting in the next prevailing section.
Accounting Concepts got a number of conceptual issues which one must understand in order to develop a strong foundation of how the accounting system works.
These basic accounting concepts are as follows:
Here the revenue is recognized whenever it is earned. While, the expenses are recognized whenever the assets are consumed.
In this concept only the revenue is recognized when there is a reasonable certainty that it needs to be realized. Here the expenses are recognized sooner, right when there is a possibility that it will be incurred.
When a business chooses a specific accounting method, it should continue using it for a long time.
The business transactions are required to be kept separate from those of its owners.
Here the financial statements are prepared on the assumption that the business will remain in operation in the future period too. With this assumption, revenue and expenses recognition may be deferred to a future period.
The expenses that are related to the revenue should be recognized in the same period in which the revenue was recognized earlier
Transactions need to be recorded when not doing so might alter the decisions which are made by a reader of a company's financial statements.
Accounting conventions are the basic guidelines that are used to help the companies to determine how to record the business transactions which are not fully addressed by the accounting standards. These procedures and principles are though not legally binding but these are generally accepted by the accounting bodies. Basically, these are designed to promote the consistency and help the accountants to overcome the practical problems which can arise while preparing the financial statements.
Four main accounting conventions are designed to assist the accountants:
Conservatism: It tells the accountants to the side of caution when providing the estimates for the assets and liabilities which means that when there are two values of a transaction available, the lower one is to be favoured.
Consistency: A company is required to apply the same accounting principles across the different accounting cycles. Once this chooses a method it is urged to stick with it in the future also.
Full Disclosure: Information that is considered potentially important and relevant is to be revealed, regardless of this whether it is detrimental to the company.
Materiality: Like full disclosure, this convention also urges companies to lay all their cards on the table, meaning they need to totally disclose all the material facts about the company.
Accounting principles are the rules and the guidelines that the companies must follow while reporting the financial data. The Standard board issues a standard set of accounting principles in the U.S. which is referred to as (GAAP). Some of the most basic accounting principles include the following:
Economic entity principle
Full disclosure principle
Going concern principle
Monetary unit principle
Revenue recognition principle
Time period principle
1. What is an Accounting System?
Ans. Accounting is a system which is designed to measure, aggregate, and then transmit the financial data for a variety of managerial purposes. In most of the organizations, the accounting system is an integral part of the overall core of the control system because of its measurement capability and the need for the measures is to facilitate control.
There are basically two types of accounting systems: The first is a Single-Entry System and the other is a Double Entry System.
2. What are Expenses?
Ans. An expense is the cost of operations which a company incurs to generate their revenue. A popular saying goes, “it costs money to make the money.” Expenses include the payments to the suppliers, employee wages, factory leases, and equipment or asset depreciation. Examples of Expenses are - Cost of goods sold, Sales commissions expense, Delivery expense, rent expense, Advertising expense etc.
3. What are Accounting Standards?
Ans. Accounting standards are the authoritative standards for the financial reporting and these are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how the transactions and other events are to be recognized and measured and then to be presented in the financial statement. Accounting standards (AS) are the general policy files. Their prior goal is to make certain clarity, reliability, consistency, and comparability of the monetary and the financial statements. They achieve this through the standardizing of the accounting insurance policies and the concepts of a nation or economic system.